Former US Federal Reserve vice chair Stanley Fischer

Federal Reserve Vice Chairman Stanley Fischer ended a distinguished career (including the presidency of the Bank of Israel) on something of a sour note. He was the last true believer in the inflation-is-around-the-corner argument and on the Fed’s macroeconomic models.

In a March 2017 speech, Fischer stated:

Estimated Phillips curves appear to be flatter than they were estimated to be many years ago–in terms of the textbooks, Phillips curves appear to be closer to what used to be called the Keynesian case (flat Phillips curve) than to the classical case (vertical Phillips curve). Since the U.S. economy is now below our 2 percent inflation target, and since unemployment is in the vicinity of full employment, it is sometimes argued that the link between unemployment and inflation must have been broken. I don’t believe that. Rather the link has never been very strong, but it exists, and we may well at present be seeing the first stirrings of an increase in the inflation rate–something that we would like to happen.

No such thing happened, and the Fed’s models failed once again. Bond investors stopped believing in Fed tightening and the bond market rallied.